Governance By the Books?

With the UK and US regulatory bodies just completing a lawsuit against three of the largest banks in the UK for breach of trust in manipulation of LIBOR (London Interbank Offered Rates), it may appear at first glance that the investment community is not considering its impact on environment, social and corporate governance (ESG), but nothing could be further from the truth.

For reference, ESG is not a new drug; it was first put forth in the United Nations Environment Programme Finance Initiative.

In Japan, the investment community is still reeling from the Olympus Corporation scandal involving whistleblower Michael Woodford MBE, and the resulting fallout in terms of stock value for shareholders.

The suggestion that Japan’s newly created corporate stewardship code is based on that of the UK seems ironic given the role of Woodford, a UK citizen, in the fraud case surrounding the Japanese electronics giant.

The Japanese government recently participated in the International Corporate Governance Network (ICGN) conference, held on 3–4 March in Tokyo, entitled “Building a common language: a new era for company and shareholder dialogue”. Even the Tokyo Stock Exchange was a participant.

The section on “Principles for Responsible Institutional Investors”, found in Japan’s Stewardship Code, reads as follows:
1. Institutional investors should have a clear policy on how they fulfil their stewardship responsibilities, and publicly disclose it.

2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.

3. Institutional investors should monitor investee companies so that they can appropriately fulfil their stewardship responsibilities and support the sustainable growth of the companies.

4. Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.

5. Institutional investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.

6. Institutional investors in principle should report periodically on how they fulfil their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.

7. To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge on the investee companies and their business environment and capabilities to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.

Motoyuki Yufu, director, Corporate Accounting and Disclosure Division, Financial Services Agency of the Japanese government, spoke at the 2014 ICGN event. He announced that Japanese firms wishing to subscribe to Japan’s Stewardship Code have until the end of May to sign up on the initial list.

Certainly being a first signatory will be a mark of distinction for all large and small businesses that are serious about ESG.

The introduction of the third plenary session at the conference, titled “Corporate sustainability reporting: confusion or consensus”, does a good job of summing up the challenges both corporate directors and institutional investors face.

It states, “There is a global trend towards better disclosure from companies around environmental and social factors driven by Europe and other market-led initiatives. This is coupled with integrated reporting efforts to demonstrate value creation through a broad spectrum of factors to ensure sustainable business practice over the long term. What are the practical challenges and opportunities that this presents?”

What should be reported, what can be reported, and how will this be used?

We all need to be aware of how this will affect those of us working in environmental and social industries.


Principles for Responsible Institutional Investors

ICGN Best Practices

UK Stewardship Code

UNEP Principles for Responsible Investment

UNFP Finance Initiative